Torpedoed Iranian ship was in naval exercises with Australia before attack

Market structure: Immediate winners are U.S. and allied defense primes (Lockheed LMT, Raytheon RTX, General Dynamics GD, Northrop NOC) and energy producers (XLE/exposure to Brent) as risk premia reprice; expect a tactical re-rating of +5–15% for select defense names over 3–12 months if volatility persists. Direct losers are regional tourism/airlines (QAN.AX, AAL), shipping lines and P&C insurers/reinsurers (short-term claims and war-risk spikes) with booking and premium-rate pressure for 1–6 months.

Risk assessment: Tail risks include rapid escalation drawing in allied forces or asymmetric cyber/commerce attacks that could push Brent >$100/bbl and widen EM sovereign spreads by 200–400bps; probability low but impact high over 1–6 months. Immediate (days) effects: risk-off shock, higher oil, gold, and USD; short-term (weeks–months): EM outflows and wider credit spreads; long-term (quarters) possible sustained defense spending increases and insurance repricing.

Trade implications: Favor a tactical overweight to defense (2–4% portfolio tilt) and energy (1–2%), hedge EM equity/debt with 3-month put spreads on EEM/EMB, and hold short-duration Treasuries/T-bill cash (TLT underweight, prefer SHY or cash) as a liquidity hedge. Use options to limit cost: 3–6 month call spreads on LMT/RTX and a 3-month Brent 85/95 call spread; add GLD exposure if Brent >$90 triggers broader risk premium.

Contrarian angles: Markets often overshoot initially — 2019 tanker incidents saw oil spikes that faded in 2–8 weeks, creating buying opportunities in EM and cyclical industrials. Avoid chasing defense names at peak IV; instead add on 10–20% pullbacks and consider shorting reinsurance spike trades once war-risk premiums normalize (expect mean reversion within 3 months absent further incidents).